Labor Law Violations in Chile - Cornell University

WP 2013-10 February 2013

Working Paper

Charles H. Dyson School of Applied Economics and Management Cornell University, Ithaca, New York 14853-7801 USA

LABOR LAW VIOLATIONS IN CHILE Ravi Kanbur, Lucas Ronconi and Leigh Wedenoja

It is the Policy of Cornell University actively to support equality of educational and employment opportunity. No person shall be denied admission to any educational program or activity or be denied employment on the basis of any legally prohibited discrimination involving, but not limited to, such factors as race, color, creed, religion, national or ethnic origin, sex, age or handicap. The University is committed to the maintenance of affirmative action programs which will assure the continuation of such equality of opportunity.

Labor Law Violations in Chile

Ravi Kanbur*, Lucas Ronconi**, and Leigh Wedenoja*** This version: February 7, 2013

Contents 1. Introduction 2. Legislation 3. Data 4. Results 5. Conclusion

Abstract This paper is a contribution to the empirical literature on quantification of labor law

violation. It takes up the case of a relatively advanced developing country, Chile, which has a high degree of administrative and bureaucratic capacity. Using micro survey data, the paper establishes the basic facts of compliance with four dimensions of labor law: minimum wage, hours worked, having a contract, and having a pension. On average over the period 1990-2009, we find that the laws were violated in at least one of these dimensions for one third of workers. However, there are large and significant variations over time, across laws and by worker and firm characteristics. Simple tabulation followed by econometric analysis shows that compliance rates are lower for women, foreign born, indigenous and less educated workers; in smaller firms; and in agricultural regions. These initial findings frame a rich research agenda on compliance and enforcement of labor law in Chile.

* 221 Warren Hall, Cornell University, Ithaca, NY 14853, USA; Corresponding Author. ** Av. Callao 542, Centro de Investigaci?n y Acci?n Social (CIAS), Ciudad de Buenos Aires, Argentina. *** 404 Uris Hall, Department of Economics, Cornell University, Ithaca, NY 14853, USA

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1. Introduction

Reform of labor law is central to the development policy discourse in developing countries, and in Latin America in particular. Proponents of deregulation argue that overly stringent legislation feeds informality and serves to hold back efficiency and growth. Opponents of deregulation argue instead that these laws curtail the power of employers and protect workers.1 However, both proponents and opponents seem to argue equally from an assumption of effective enforcement of the laws. At least, they do not focus on issues of enforcement or violation of laws. In the extreme case, if the laws are not enforced at all, then the deregulators have the outcome they want by default and their opposition to the current laws is somewhat tangential. Even if violation is partial, both proponents and opponents will have to modify their arguments suitably.

But, how much violation is there of labor laws? The question is at heart an empirical one, and dependent on context and institutions. A growing body of literature has attempted to quantify the degree of compliance.2 The broad conclusion is that compliance is far from complete, and the degree of violation varies across countries and across regions and sectors within countries.

This paper is a contribution to the empirical literature on quantification of labor law violation. It takes up the case of a relatively advanced developing/middle-income country, Chile, which has a high degree of administrative and bureaucratic capacity. Using micro survey data, the paper establishes the basic facts of compliance with four dimensions of labor law: minimum wage, hours worked, having a contract, and having a pension. On average over the period 1990-2009, we find that the laws were violated in at least one of these dimensions for one third of workers. However, there are large and significant variations over time, across laws, and by worker and firm characteristics. Simple tabulation followed by econometric analysis shows that compliance rates are lower for women, foreign born, indigenous, and less educated workers; in smaller firms and in agricultural regions.

The plan of the paper is as follows. Section 2 sets out the basic legislative frame of labor regulation in Chile. Section 3 discusses the data source used in the paper. Section 4 presents the main results, and Section 5 concludes with implications for policy and research directions.

2. Legislation

According to Chilean legislation, employers must comply with a number of universally applicable regulations, including writing and signing a labor contract, paying at least the minimum wage, providing a safe and healthy work environment, complying with collective bargaining agreement provisions, and contributing to the social security system.

1 See World Bank (2012) for a recent review of the literature. 2 See for example, Strobl and Walsh (2003), Maloney and Nunez (2003), Kristensen and Cunningham (2006), Andalon and Pages (2008), Ronconi (2010), and Bhorat et al. (2012a).

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In this section we briefly describe those regulations for which the available data allows measuring the extent of compliance.3

First, employers must provide each worker with a signed copy of his or her labor contract. Having a written contract does not provide any direct legal benefit to workers (e.g., workers are not required to have a written contract to enforce their rights in the court). However, it presumably helps workers to know their rights and establishes pay, hours, and other expectations specific to the job. Furthermore, evidence suggests that the majority of workers in Latin America wrongly believe that they cannot enforce their rights without having a copy of the contract (Piza, 2009).

The minimum wage (known in Chile as ingreso m?nimo mensual) is set by the government and varies according to the age of the worker. There is, however, no variation across regions. The minimum wage is usually modified once a year. In July 2012, the monthly minimum wage was 193,000 pesos (386 USD) for workers aged 18 to 65 and 144,079 pesos (288 USD) for workers younger than 18 or older than 65 working full-time. For part-time workers the minimum wage is proportional to the number of hours worked.4 Since March 2011, the same standards also apply to domestic workers.

The maximum number of hours per week that people can work is 57 (i.e., the ordinary workweek is 45 hours and overtime cannot exceed 12 hours per week).5 Before 2005, the maximum number of hours was 60 (ordinary workweek was 48 hours and overtime 12 hours). Workers are required to receive overtime pay at a rate not less than time and one-half of their regular rate of pay.

Finally, employers and employees are required to contribute to the social security system. Social security benefits include pension, unemployment insurance, health insurance, and workers' compensation insurance. The total contribution represents approximately 24% of the wage, and the contribution to the pension system is, on average, 12.4% (Aguila et al., 2010).6

The legislation also determines the level of fines when employment, social security, safe and healthy, and labor relations regulations are violated. Fines usually vary depending on the size of the firm and in some cases depending on recidivism. Table 1 presents the values of fines in July 2012.

3 The Encuesta Laboral (ENCLA) allows measuring the extent of violations with some health and safety regulations, but we have not been able to access the micro data. Aggregate figures provided by the government (Direcci?n del Trabajo, 2009), show that 25.5% of firms do not comply with the obligation of having a safe practices manual; and 31.7% of firms with 25 employees or more violate the obligation of having a health and safety committee that includes workers' representatives. 4 For example, the minimum wage for an employee who works 30 hours per week is two thirds the above figures since the ordinary workweek of a full time worker is 45 hours. 5 These limits do not apply to managers and to workers who perform their duties outside the firm (such as traveling salesmen). Different regulations apply to workers in the transportation, hotel and restaurant sectors. 6 Ten percentage points go to the worker's individual account, and the remaining amount covers disability insurance and the fees charged by the pension fund manager. The contribution to the pension system is entirely deducted from the worker's salary, and the employer has the obligation to do it.

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Table 1 ? Fines for Noncompliance with Labor Regulations (in USD)

Violation

Written contract (a) Minimum wage (a) Maximum hours (a) Pension (b) Safe practices manual (c) Health and safety committee (c) Dept. occupational risk prevention (c)

Size of firm (No. of employees)

1 to 49

50 to 199 200 or more

396

792

1,188

792

3,169

4,754

792

3,169

4,754

407

407

407

713

2,377

3,169

792

3,169

4,754

792

3,169

4,754

Notes: The law sets fines using two units of measurement (Unidad de Fomento for pension contributions and Unidad Tributaria Mensual for the rest) which are updated daily or monthly by the government. The table presents the figures in USD at July 2012. (a) Fine per worker; (b) fine per worker assuming lack of contribution during one year; (c) fine per establishment.

3. Data

The main source of data for this paper is the National Socioeconomic Characterization Survey (CASEN)7 from Chile, which is a repeated cross-sectional household survey. The survey is funded by the Chilean Social Development Agency and administered by the University of Chile MIDEPLAN8, INE9, and CIENES.10 The survey was administered every two years from 1990-2000 and every three years thereafter. The survey is designed to be representative at the national, regional, and geographic stratification (urban v. rural) level. The sampling unit is the household and sampling is based on census figures. Interviews are conducted in person. The scope of the survey was gradually expanded in order to be representative for smaller communities and also to include more questions.11 CASEN contains question modules on health, education, work characteristics, home characteristics, and a variety of other socioeconomic variables of interest. The interviews are conducted in November and December of each survey year.

This survey is ideal for measuring labor law violations for two reasons. First, employees are more likely to report their actual working conditions compared to employers since they are not fined in case of noncompliance. Second, the survey asks detailed questions of respondents about personal characteristics and the characteristics of their jobs. This allows us to match workers with the labor standards they are subject to. It also allows us to evaluate which characteristics of workers and firms are associated with higher levels of labor standards violations. Respondents are asked questions about their current work status, the number of hours they usually work per week (or month), and the number of

7 Encuesta de Caracterizaci?n Socioecon?mica Nacional. 8 Ministerio de Planificaci?n y Cooperaci?n. 9 Instituto Nacional de Estad?sticas. 10 Centro Interamericano de Ense?anza Estad?stica. 11 The number of individuals included in the survey increased from 105,189 in 1990 to 246,670 in 2009.

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days. They are also asked to provide detailed industry code information and details about their place of employment and position. They also answer basic questions about working conditions including whether they have a contract with their employer, if that contract is signed, if they have a pension, and what type of pension plan they have.

The population of interest for this paper is workers who identify themselves as employees, rather than employers, bosses, or the self-employed, and who do not work in domestic service since a slightly different set of labor laws apply to those workers.12 We measure violation of the hourly minimum wage and calculate the hourly wage of a worker based on her or his self-reported hours and income and then classify the worker as under the minimum wage if that wage is less than the hourly minimum wage once the monthly minimum is scaled for the standard workweek of 45 or 48 hours depending on year. One potential problem with this method is that self-reported hours and wages can often lead to measurement error due to recall bias or rounding which could result in mis-categorizing workers as in compliance or not in compliance with the minimum wage. An alternative strategy is to look only at full time workers and violations of the monthly minimum wage. However, while this often does estimate a slightly higher level of compliance, the increase in compliance is usually less than 1 percentage point. Additionally, the high level of hours violations leads us to believe that violations of the hourly minimum wage is what matters whether or not the violation derives from workers working more hours than their wage mandates or being paid less than their hours legally mandate.

We use three measures of minimum wage violation based on Bhorat et al. (2012a) all of which take the form:

V = E { [(wm ? w)/wm] if wm ? w >0; 0 if wm ? w 0 }.

The first measure, = 0, is the standard headcount violation measure. The other two measures of minimum wage violation are measures of depth: = 1 measures the shortfall depth and all > 1 places larger emphasis on larger gaps. We report = 2 as a measure of the severity of minimum wage violation. Additionally we report V1/V0 which measures the average percent paid below the minimum wage for all sub-minimum wage workers.

Measuring contract and hours violations is more straightforward. Workers are classified as having no labor contract if they report either that they do not have a contract, or that their contract has not been signed by an employer. The alternative definition, where only workers who report directly that they do not have labor contracts (excluding those whose are unsigned), does not change the results in any meaningful way. Workers are classified as working more than the maximum level of hours (60 or 57) if they report weekly hours above the threshold or they report monthly hours above 4.2 times the threshold. Workers are classified as not having a pension if they report that they are not covered by any of the available pension systems (both public and private.) Finally, an overall measure of labor law violation is computed, which is defined as the share of workers with at least one violation in any of the four analyzed legally mandated benefits.

12 Only 5% of workers are in domestic service in the sample.

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4. Results

Table 2 shows the extent and evolution of minimum wage violations from 1990 to 2009. Overall, almost 20% of workers covered by the minimum wage are paid below it during the analyzed period. The level of minimum wage violation was increasing from 1990 to 2006 (with the exception of 1994). Table 2 shows that minimum wages were relatively flat compared to the average wage for prime aged workers in jobs covered by the minimum wage, but that it increased by comparison beginning in 1998. Between 2006 and 2009, however, there was a large reduction in the level of noncompliance that coincides with a reduction in the minimum wage relative to the average wage. The depth of violation follows a similar trend. Workers paid below the minimum wage are paid on average 25% below, with a high of 26% in 1990 and a low of 22% in 1998.

Table 2 ? Trends in Violations of Minimum Wage, Hours, Contract and Pension

Minimum Wage Violations Real Min.

Year

V0

V1

V2

V1/V0

Min. wage

wage/Avg. wage

Hours

No contract

No pension

Any violation

1990 0.148 0.039 0.018 0.263 433.1 0.322 0.111 0.162 0.184

1992 0.163 0.043 0.018 0.261 457.4 0.335 0.098 0.141 0.198

1994 0.141 0.036 0.015 0.253 492.0 0.319 0.081 0.198 0.179

1996 0.161 0.039 0.015 0.239 531.8 0.310 0.084 0.199 0.184

1998 0.163 0.037 0.013 0.227 585.8 0.338 0.089 0.239 0.221

2000 0.201 0.048 0.018 0.241 678.2 0.361 0.082 0.188 0.182

2003 0.214 0.049 0.018 0.230 718.7 0.387 0.068 0.199 0.174

2006 0.293 0.071 0.028 0.241 831.1 0.475 0.109 0.189 0.157

2009 0.153 0.038 0.016 0.246 881.8 0.432 0.078 0.177 0.071

Total 0.182 0.044 0.018 0.245 -

0.364 0.089 0.188 0.172

Notes: Real minimum wage is calculated using the CPI from the Chilean Central Bank. Average wage is the average hourly wage for prime aged workers (25-55) subject to the minimum wage.

0.366 0.371 0.348 0.365 0.393 0.376 0.380 0.452 0.331 0.377

Table 2 also presents measures of violations for the other regulations we study. The percentage of workers without a contract also increased during the nineties reaching its peak in 1998 at 23.9%, but has declined since then. The percentage of people without a pension follows a similar pattern as contract violation: 13 it increased during the nineties ? reaching a peak value of 22.1% in 1998? and declined during the 2000s'; unlike contact violations, it experienced a sharp drop between 2006 and 2009 of similar magnitude to the reduction in minimum wage violations. In contrast, maximum hours violations have a negative trend over the entire period that was only interrupted in 2006, presumably due to

13 Pensions violations are heavily tied up with contract violations: two thirds of workers without contracts also do not have pensions compared to only 6% for those with contracts.

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